We examine the consequences of the implementation of the regulation on audit firm structural reform in China, that requires all securities-related audit firms to make a one-time, irreversible election to limited liability partnership (LLP) by the end of 2013. Given the enlarged legal liabilities of individual partners in an LLP firm, this regulatory shift has been argued to have been manifest in changed auditor behavior regarding their audit efforts and quality. While this organizational structure reform legislation was intended to benefit all audit firms, recent research suggests that it may have differentially affected individual auditors based on the importance of their audit clients. 

We explore two research questions : (1) does increasing legal liability induces higher partner-level audit quality and greater fees after the new regulation? (2) how does enlarging liability exposure affect individual partners' behavior in the presence of client dependence?

We find that the overall audit quality is improved when the accounting firms are transformed into LLP. At the firm level, the effect of legal liability on audit quality is conditional on client dependence. At the partner level, the effect is no longer conditional on client dependence. Because the mandatory transformation increases the litigation exposure of the partner, protecting themselves from legal liability matters more than client retention.

Auditor Legal Liability, Audit Quality, and Client Dependence--Evidence from Mandatory Transformation of Auditor Organizational Form in China.

[Annual Meeting Website](https://aaahq.org/Meetings/2020/Annual-Meeting)

[Benefits for Presenters](https://aaahq.org/Meetings/2020/Annual-Meeting/Presenter-Benefits)

 AAA 2020 Virtual Annual Meeting and Conference on Teaching and Learning

The American Accounting Association is the largest community of accountants in academia. Founded in 1916, we have a rich and reputable history built on leading-edge research and publications. The diversity of our membership creates a fertile environment for collaboration and innovation. Collectively, we shape the future of accounting through teaching, research and a powerful network, ensuring our position as thought leaders in accounting.